When Should You Charge Sales Tax in Texas?

Sales tax in Texas is a fundamental aspect of commerce, serving as a significant revenue source for state and local services. Businesses selling goods or providing certain services within the state are responsible for collecting this tax from customers. The collected sales tax is not business revenue; instead, it is held in trust for the state. Businesses act as agents for the Texas Comptroller of Public Accounts, facilitating collection and remittance. Adherence to regulations is crucial to avoid penalties and maintain compliance.

Determining Taxable Goods and Services

Sales tax in Texas primarily applies to the sale, lease, or rental of tangible personal property. Tangible personal property refers to physical items that can be seen, weighed, measured, felt, or touched. This includes most physical goods, from consumer products to machinery and equipment.

Certain services are also subject to Texas sales tax. The state enumerates taxable services, and businesses providing these must collect sales tax. Examples include amusement services, cable television services, data processing services, and repair or remodeling services for tangible personal property.

Labor charges for fabricating or processing tangible personal property are also taxable, even if the customer supplies the raw materials. This applies to activities like tailoring, woodworking, producing artwork, and assembling items.

Common Sales Tax Exemptions

Several situations and types of sales are exempt from Texas sales tax. One common exemption is for items purchased for resale. When a business buys goods for resale, they do not pay sales tax on the initial purchase. This prevents double taxation, as sales tax is collected when the item is sold to the final user.

Another exemption applies to certain items used in manufacturing. Tangible personal property that becomes an ingredient or component of an item manufactured for sale is exempt. Machinery and equipment used directly in the manufacturing process that cause a physical or chemical change to the product, or an intermediate product, also qualify for this exemption.

Agricultural items and certain medical necessities also have exemptions. Seeds, fertilizers, livestock feed, and farm machinery can be exempt for qualifying farmers and ranchers who hold an Agricultural and Timber Exemption Registration Number. Prescription drugs, insulin, and certain medical devices like prosthetics and hearing aids are exempt from sales tax. Qualifying non-profit organizations may be exempt from paying sales tax on purchases or collecting it on certain sales.

Applying Sales Tax to Specific Scenarios

When labor is performed on tangible personal property, such as repairs, remodeling, or restoration, the labor charges are taxable. This includes services like appliance repair, furniture refurbishing, or jewelry repair. The taxability hinges on whether the service directly modifies or restores a physical item.

Real property services, such as repairs or remodeling to buildings, have distinct rules. Nonresidential real property repair, restoration, or remodeling services are taxable. Services performed on residential real property, like family dwellings or housing complexes, are not subject to sales tax. New construction or improvements to real property involve taxable materials, but the labor for installing these materials on real property is not taxable.

Digital products and software. Texas considers digital goods, such as streaming services, e-books, and software as a service (SaaS), to be taxable. Taxability depends on the nature of the access or license, categorized as a sale of tangible personal property or a taxable data processing service.

Rentals and leases of tangible personal property are subject to sales tax in Texas. This applies to both operating leases, where tax is collected on each periodic payment, and financing leases, which may be taxed upfront on the full value of the property. Long-term residential leases for real property, exceeding 30 days, are exempt from sales tax, while short-term lodging rentals are taxable.

When taxable and non-taxable items or services are sold together for a single price in a bundled transaction, the entire transaction may become taxable. Businesses must assess these bundled sales to determine the appropriate sales tax treatment. Proper invoicing and separation of charges can help clarify tax obligations.

Sales Tax Obligations for Remote Sellers

Businesses located outside of Texas may be required to collect and remit Texas sales tax if they establish “nexus” with the state. Nexus signifies a sufficient connection between a business and a state, triggering a sales tax collection obligation.

Physical presence nexus occurs when a business has a physical tie to Texas. This includes maintaining an office, warehouse, or other physical location, having employees or sales representatives in the state, or storing inventory within Texas. Attending trade shows or leasing equipment in Texas can also create physical nexus.

Economic nexus is another way remote sellers establish a sales tax obligation, even without a physical presence. Texas mandates that out-of-state businesses must register to collect and remit sales tax if their total sales revenue into the state exceeds $500,000 in the preceding 12 calendar months. This threshold includes gross revenue from both taxable and non-taxable sales, and sales made through marketplaces.

Marketplace facilitators, such as online platforms, also have responsibilities. If a marketplace facilitator processes sales exceeding the $500,000 threshold into Texas, they are required to collect and remit sales tax on behalf of the third-party sellers using their platform.